A blog on Chinese economy & society

Posts Tagged ‘China

Chinese labor saga continues

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Local HK media is reporting that 300 workers at the Beijing factory of Korea’s Lotte Group have been striking for 3 days over wages, shutting down production completely.

The workers allege that Lotte, while officially pays them Rmb1,700 a month, deducts many “fees” from their paycheck, resulting in real monthly pay of only Rmb900, which is lower than Beijing’s minimum wage.

The strikes at Honda etc.had received wide publicity and tacit governmental support. Although this newest episode of labor dispute is different in that it happens in the nerve center of China, I expect it to be resolved in favor of the workers, as their quest is inline with the government’s goal of rebalancing the Chinese economy.


Written by Cindy Luk

August 19, 2010 at 2:41 am

Posted in China, Industries & Companies

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China’s share of global GDP

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Why is China overtaking Japan to be the 2nd largest economy newsworthy? But for some strange reason, it’s all over the place, some more interesting than others. The Economist has recycled Angus Maddison’s data to give some historical background.

As to The Economist’s rhetorical question,

China and India were the biggest economies in the world for almost all of the past 2000 years. Why they fell so far behind may be more of a mystery than why they are currently flourishing.

many readers have resorted to a chicken and egg answer: that China and India had the biggest populations. Hello! Doesn’t having a large population in an agrarian economy in and of itself suggests higher productivity (due to whatever reason), and hence more surplus? Chinese population was almost HALVED after the fall of the Eastern Han Dynasty in 220CE. There were numerous accounts of the horrendous famines and population loss in the early 17th century, before the fall of Ming. So it’s in fact large economies that make large populations sustainable, instead of the other way round.

As to China and India’s sudden fall from the first league, the quick and easy answer is colonialism, which I think is wrong again in terms of cause and effect. Colonialism is like germs that populate our living world. It simply invades countries that have been weakened by other reasons. By the 19th century, China was already in her dying throbs. As such, the GDP share seems like a lagging indicator of a nation’s economic wellbeing.

One of the best books that deal with this fascinating topic is The Great Divergence, by Kenneth Promeranz. Mind you, the writing is horrible, but it’s well worth the effort.

Written by Cindy Luk

August 18, 2010 at 2:33 am

Chinese savings rate to plummet?

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Speaking of collapsing Japanese savings rate, could the Chinese savings rate take the same dive in the not to distant future? BIS has come out with a new report that answers with a resounding yes.

Instead, we argue that tough corporate restructuring……, a marked Lewis-model transformation process…… and rapid ageing process have all played more important roles [in explaining high Chinese savings rate]. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand.

The authors basically see several social and economic factors uniting to drive down Chinese savings rate. First and foremost should be the slowdown in long term economic growth coming from the restructuring of Chinese industries. As China gradually rebalance towards its domestic market, trend growth inevitably slips. You can’t save what you don’t have.

Another factor is simply having less people joining the workforce, having hit the so-called Lewis Inflection Point. The resent labor shortage and unrest in China is another facet of the same demographic change. With less people saving, of course the overall savings will decline.

The last kicker is the aging of the population. Due to the draconian one-child policy, China is aging rapidly. And Japan has already shown the world what happens when your retirees need to draw down on their savings….

If the authors are right, then it doesn’t matter which side of the “savings glut” theory you stand, ’cause it an’t gonna last very long.

What does this mean? Does it imply that China would have to pawn its reserves? Possibly, but I think the reserves would have been long gone by then to pay for the clean up of the bad debts in Chinese banks. It will certainly mean soaring interest rates in China, and across the globe.

Written by Cindy Luk

August 10, 2010 at 6:44 am

Posted in China, Macro

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To tighten or not to tighten, that is the question

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Despite soaring June exports, Chinese economy is heading south in the H2, so much so that some banks are quietly relaxing the ban on 3rd mortgages. The practice must be widespread enough to entice speculation that the tough crackdown on property market since April will be loosened up and lifting the share prices of the battered property companies. Naturally, a spokesperson from the China Banking Regulatory Commission came out denying all these as groundless speculation and insisted that the government will continue in its tightening efforts.

But China is at a crossroad, with exports expected to dip in July, there is concern that continuing the tightening measures might knock the air out of the economy. However, the government is also under severe political pressure to “do something” about the runaway property prices which are way above what ordinary Chinese can afford. Relaxing the efforts will be seen as giving in to the rich and powerful, not to mention that further blowing asset bubble is hazardous to China’s long term economic health.

Yes, China is definitely between a rock and a hard place now.

Written by Cindy Luk

July 12, 2010 at 11:22 pm

China’s car sales fell 17% in June

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Yes, GM is selling more cars in China than in the US, but this really doesn’t tell us much about the state of the economy.

The fact is passenger car sales dropped 17% from May in China, according to the newest data release from an industry association. This is already the third monthly decline in a row. While sales still grew by 19% over 6/09, it paled beyond comparison when you consider that 6/09 grew 45% over the previous year.

What’s more alarming is that production actually shot up 27% year-on-year, implying  drastic cutbacks in production to clear for inventory built-up down the road.

Currency flexibility means that it can swing both ways…

Written by Cindy Luk

July 4, 2010 at 2:27 pm

Posted in China, Industries & Companies

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The real Chinese revaluation story

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The media has been busy propagating and debunking the RMB revaluation story, but I think both narratives are off-target. Yes, China is having a significant revalution, just not with its currency.

Instead, China has chosen an aggressive program of internal revaluation, i.e. raising costs for the exporters internally, by inducing wage-led inflation, cutting export subsidies, and stiffening environmental regulations etc.

Most of the recent coverage of China’s labor disputes have focused on the workers’ being simply more demanding in sharing the spoils. But one should also note the subtle, and very important, support that the Chinese government is giving them. Besides rallying behind the workers in state media, labor activists have been allowed to organize freely (rare for China’s pro-capital government), so long that they train the target on wage demand only. Raising the minimum wage is also a cue for the workers that their action is being sanctioned by the state.

Why is China going this route instead of currency appreciation recommended by the developed economies? Well, this is simply a better way of adjustment for China. With currency appreciation, the losses to Chinese exporters become gains for exporters in other countries, i.e. a net loss of wealth for China. With internal revaluation, the benefits go towards Chinese workers, i.e. only a redistribution of wealth within China. This later approach also helps in building up a middle class and reorient the economy towards more consumption.

Another way to achieve internal revaluation is by cutting export subsidies. China has announced cutting export rebates on over 400 types of products deemed energy-intensive or polluting. This allows the government to target only industries deemed inefficient and force them to upgrade, and helps soothing trade relations with the West as a bonus.

The implementation of environmental regulations has also been tightened, to the benefits of future generations of Chinese. Again, this is an area that simple currency appreciation may not be as effective.

At the end of the day, although China has decided to bite the bullet and pony up for rebalancing its economy, it still seeks to minimize the costs and maximize the benefits. It’s just that their preferred method may not be the most desirable one from the POV of the developed economies.

Written by Cindy Luk

June 24, 2010 at 5:17 am

Labor movement in China

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The spat of suicides at a leading OEM supplier (for Apple, HP etc.) Foxconn has attracted most of the media attention, but it’s the other labor related unrest that will have greater impact over the long term. Or perhaps these are two sides of the same coin.

Media reports tend to focus on Foxconn’s alleged harsh working conditions. The truth is that Foxconn is far from a sweatshop, evident by its having no problem attracting workers in this age of labor shortage. It’s suicide rate, horrific as it seems, is no worse than the national average. But does this mean all’s swell at Foxconn?

The first suicide in this recent string was committed by a worker that lost Apple’s super duper secretive iPhone prototype, and apparently faced a lot of pressure from the management. Scribblings from the other victims seem to point to many vague uncertainties in life, things that do not seem dire enough to push people to the brink. Things that might just blow over had they had someone to talk to.

Foxconn employed about 400,000 people in the vicinity of Shenzhen, large enough to be its own town in a sense. But among all these masses of uprooted migrant workers, there’s no official organization of association. In fact, any form of liaison among workers is actively discouraged, for fear of fostering labor movement. Without a proper support network, vague disappointments in life often turn deadly.

But management’s fear is not unfounded. Just ask Honda China, which has been hit with a strike that paralyzed its four auto plants in China. After 2 weeks of standoff, Honda is now offering 24% raise in a bid to end the strike.

China’s official “union” basically works for the government and businesses in suppressing labor movement. No I’m not kidding. The union actually got into a scuffle with the striking workers over the weekend. The strike is led by second generation migrant workers in their twenties. Compared to their forefathers, they are better educated, more assertive in advocating their rights, and more media savvy. Coupled with a tight labor market, and the fact that Honda China sells mostly domestically (hence cannot move the production offshore under Chinese law), the workers have much higher bargaining power.

What’s more important is the demonstrative effect this strike has in a country that’s already been plagued with labor unrest. 5000 workers have been blocking a textile factory in Henan Province for about half a month. Labor demonstration also broke out in Beijing over the weekend. Honda workers have taped their deeds and post on the internet in an attempt to generate public awareness and support. Their success will embolden a true labor movement in China in the future.

Written by Cindy Luk

June 1, 2010 at 5:17 pm